What did Prosper know – and when did Prosper know it?

There are indications to suggest that Prosper had awareness for some time that the product they sold amounted to unregistered securities.

For my own benefit, I am in the process of attempting to compile a timeline of key events during the life of Prosper.com and link these with assorted other developments to help me get my head around all this.  Please note that this still a work in progress.  Given Prosper’s propensity to delete potentially inciminating statements from their web site, certain information is sourced to content reproduced by non-Prosper sites.

February 2006
Prosper opens to the public.

October 25, 2006
Speaking as part of Stanford’s Entrepreneurial Thought Leader Speaker Series, Chris Larsen, CEO and co-founder of Prosper.com and Jim Breyer, Managing Partner at Accel Partners, stress the value of having approval in a regulated industry. Larsen draws on his experience from E-Loan and Prosper in suggesting that while it is cumbersome, if an idea is in the interest of the consumer, it is not difficult to obtain approval.

See the following brief video clips:

on “the emotional rollercoaster…”

On “defensibility through regulatory constraints…”

On “managing the burn rate…”

Listen to the entire conversation:

May 24, 2007
LendingClub launch

October 30, 2007
Prosper files form S-1 with the SEC “seeking to establish and maintain a secondary trading market online auction platform, and to provide various administrative, clerical, recordkeeping, identity verification, payment processing, collection and other services, with respect to the Prosper Marketplace Borrower Non-Recourse Notes, or the Notes.”

November 1, 2007
In response to Prosper’s attempted S-1 filing, the SEC isues a scathing rejection letter.  The SEC’s letter can be found here.

November 8, 2007
Prosper files with the State of Michigan, seking to register securities.

April 2008
“Lending Club, a start-up based in Sunnyvale, Calif., that facilitates borrowing between members of social networks like Facebook, asked the S.E.C. for permission to create a secondary marketplace — a place on its site where lenders could resell their loans and cash out before the end of a loan’s three-year life cycle.” (New York Times)

April 8, 2008
Prosper issues the following statement:

“Person-to-person lending is an increasingly popular way for individuals to borrow and lend money at attractive interest rates. Understandably, it must be done in a secure and trusted way. While we’re not in a position to comment on another company’s regulatory stance, Prosper believes that the way we have structured the Prosper marketplace is in compliance with applicable state and federal laws. Currently Prosper has over 650,000 members, and more than $130 million in loans have funded through the Prosper marketplace.”

May 28, 2008
Kentucky Department of Financial Institutions (DFI) was the first state regulator to take formal action against the company. DFI issued a stop order on May 28 halting the sale of the securities in the commonwealth, which was later replaced with an agreed order on June 20.

June 20, 2008
LC files with SEC, enters quiet period

July 31, 2008
Prosper co-founder John Witchel abruptly resigns from the company.

August 1, 2008
LendingClub files rom S-1 with the SEC.

October 1, 2008
Loanio opens for business

early October
Zopa Closed down

October 13, 2008
“On Monday, Mr. Larsen said he did not believe Prosper would need to follow the same arduous route, pointing out that Lending Club sets the interest rates on its loans and was itself financing about half the overall loan volume on the site.” (New York Times)

October 14, 2008
“But on Tuesday, Prosper changed its mind and also filed to create a secondary marketplace, halting activity on Prosper.com. The company would not comment, citing the quiet period, but the painful step suggests that it too decided it needed to obtain proper registration from the S.E.C. and avoid any legal ambiguity that could get it into regulatory trouble.” (New York Times)

LendingClub emerges with a successful SEC registration and resumes business.

Prosper goes quiet

October 15, 2008
Prosper “stopped allowing lenders to make new loans, saying it needed to wait while the Securities and Exchange Commission evaluated its regulatory filings.” (New York Times)

November 24, 2008
The SEC issues a Cease and Desist order against Prosper Marketplace.

November 26, 2008
Loanio suspends operations

Three Prosper lenders file suit against Prosper Marketplace (and certain named individuals) in California Superior Court.

November 28, 2008
An interesting posting by Giles appears over at Zopa.

We always took the view that the SEC would likely view our platform, as operated in the UK and Italy, as requiring registration with them. Individual promissory notes from borrowers could be seen as “securities” needing registration, and even if not then the firm at the centre dealing with them could require it. That’s the key reason why we didn’t launch our UK model in the US and watched with great interest when others did proceed with platforms that we felt carried regulatory risk. Lending Club were the first to acknowledge this risk in seeking registration in April, a process which took 6 months at a time when the SEC were arguably a little less “occupied” than today. At least they submitted themselves voluntarily which must have earned them some brownie points. They had also, rather smartly in my view, obtained some institutional funding in order to be able to continue lending, albeit on a small scale, while they were closed to working with normal “retail” lenders. We share something with Lending Club in that we both believe that P2P platforms should provide some added value in credit assessment and not leave this highly complex area solely to uninformed amateurs – no offence intended to any such people reading! The benefit of this approach has been borne out by their much better loan repayment performance than other US players.

However the interesting point is not just whether SEC registration is required, and if so how to get it, but what does an SEC registered business then look like? Our understanding is that it involves making your entire website in effect into a giant prospectus with all the verification issues that entails. I think it looks very difficult to run an interesting business that way.

The next event of note was Prosper deciding last month, one day after issuing a statement that it saw no need and after Lending Club had reopened for business , to seek SEC registration à la Lending Club. What sequence of events led to this Damascene conversion is open to conjecture. However it is noteworthy that the SEC issued a “Cease and Desist” notice to Prosper earlier this week, so it looks like some feathers are somewhat ruffled.

Finally we have just heard that Loanio has also entered a “quiet period” while it makes the appropriate registrations with securities authorities. See this story at finextra for more.

(Editor’s note) From what I understand, a Freedom of Information Act request has been filed with the SEC, seeking access to the correspondence between Prosper and the SEC. I look forward to bei able to contnue to flesh out this timeline.

December 1, 2008
NASAA, the group of national state securities commissioners, announced a settlement with Prosper Marketplace Inc. for the selling of unregistered securities to the public. As part of the settlement, Prosper Marketplace agrees to pay a fine of $1 million.

Read additional info here.

December 5, 2008
Prosper files Amendment No. 1 to Form S-1 

December 8, 2008
 Notice of motion for an order granting class certification  is filed with the California Superior Court

January 16, 2009
Prosper files Amendment No. 2 to Form S-1.

April 14, 2009
Prosper files Amendment No. 3 to Form S-1.

April 16, 2009
Prosper, on a teleconference with the California Department of Corporations and SEC staff advised the parties that Prosper intended to commence an intra-state offering. Discussiona and background can be found here.

April 28, 2009
Prosper resumes operation of their intra-state offering.

April 29, 2009
The SEC dispatches response to Prosper’s Amendment No. 3 to Registration Statement on Form S-1.  This letter includes a tersely worded missive regarding Prosper’s statements in the April 16 conference call and the plan to resume the intra-state offering.

The SEC letter can be read here.
Additional discussion can be found here.

May 9, 2009
Prosper is, once again, shut down.

May 29, 2009
Prosper files Amendment No. 4 to Form S-1.

June 12, 2009
The SEC responds to Prosper’s Amendment No. 4 to Registration Statement on Form S-1.  This is the so-called “Fred93 letter.”

The actual letter can be found here.

June 26, 2009
Prosper files Amendment No. 5 to Form S-1.

July 9, 2009
Prosper files Amendment No. 6 to Form S-1.

July 10, 2009
Prosper’s registration statement with the SEC was declared effective.

July 13, 2009
Prosper resumes lending.

Summer 2009
At some point during the summer, Prosper’s General Coundel Ed Giedgowd departs the company.

August 2009
Prosper names Sachin Adarkar (a long-time unemployed lawyer) as its new General Counsel.